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(Editor’s note: This is the second story in CFO.com’s spotlight series on compensation committees. To read the feature article, “The Gorilla Across the Table,” click here.)

It’s just a short paragraph in small roman type buried at the bottom of the page in the New York Stock Exchange’s new corporate governance proposal. But experts say this small bit of regulatory fine print could have a dramatic impact on the way corporations decide on the pay packages of top executives.

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Certainly, the provision seems innocuous enough. Tucked into the commentary section below the declaration of independence of board compensation committees, the paragraph gives those committees the sole authority to hire and fire compensation consultants. It also gives comp committees the final say about the fees and retention terms of such consultants.

So what’s noteworthy about that? The answer, board watchers say, is that such a setup amounts to a power shift in who makes compensation decisions at scores of companies.

Typically, responsibility for determining the pay of workers and executives has been the look-out of the human resources department. Reporting either to the CEO or CFO, HR managers also tend to hire — and oversee — compensation consultants.

Interestingly, observers say the NYSE provision, which was issued in August, will not likely change the way companies deal with the pay of lower-level employees. But compensation consultants believe it could make a big difference in how corporations dope out the pay packages of senior executives. “Power will shift to the compensation committee and its own advisers,” predicts Frederic Cook, chairman of management compensation consultancy Frederic W. Cook & Co. Cook. “It will shift away from the [HR] staff and the CEO himself.”

In that dust-up, there will undoubtedly be a struggle to see who has access to compensation data. Up until now, chief executives (operating through HR and personnel staffs) have been in command of internal performance info, external benchmark reports, and, ultimately, the pay recommendations consultants provided to comp committees. The fact that management held sway over the numbers, Cook asserts, “had a positive upward effect on pay.”

While such an arrangement tends to lead to higher pay for executives, critics say it can also lead to a whole lot of boot-licking. “A comp consultant who is beholden to management is going to support an initiative that management supports,” asserts Charles Elson, director of the Center for Corporate Governance at the University of Delaware. “And that initiative may not be in the interest of shareholders.”

Nice Dreams

Of course, in theory, pay consultants have been working for comp committees all along.

Other theories: man descended from fruit, gold should be taken internally, and Abraham Lincoln was shot by Shirley Booth. As Elson points out, the mere fact that compensation advisers are hired by management has spawned strong suspicions that the consultants are biased in favor of fatter executive paychecks.

Not that many compensation consultants will have serious problems with the NYSE rule, mind you. Under the proposal, which should be approved by the Securities and Exchange Commission in the next few months, comp committees’ will need a great deal of independent advice. Filling that need could provide a nice new source of business for some advisers.

Still, the market for such a service is likely to be limited to a small number of the 2,800 NYSE-listed companies. “I think there’ll be more hiring of outside consultants who are independent and who are beholden to the committee,” says Cook. “But I don’t think it’ll be universal.”

Right now, observers say boutique executive comp advice firms like Cook’s, along with diversified benefits consultancies like Towers Perrin, Hewitt, and Watson Wyatt, stand to do best under the new guidelines. They also note that the Sarbanes-Oxley Act bars accountancies (including the Big Four firms) from performing non-audit services for a current audit client. The prohibition could provide an opening for benefits consultants, many of whom appear eager to steal away Big Four consulting clients.

But the news isn’t all good for marquee employee benefit players. A number of those firms offer umbrella services for corporate clients. If a compensation committee decides, for instance, to hire its own adviser, an existing all-purpose benefits consultant hired by management could lose business.

Such a situation might even induce some ugly turf wars. Richard Harris, senior executive compensation consultant at Mercer Human Resource Consulting, says corporations could find themselves saddled with “two consultants — one for the committee and one for the management team — dueling over data and conclusions.”

In Harris’s view, such conflicts make for poor corporate governance. Ideally, comp committees and management teams shouldn’t be at odds, he says, since “they’re both trying to make sure that the right people are being paid the right way so that greater shareholder value is created.”